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Wednesday, May 16, 2012

This Decline Isn't a Selling Panic, It's a Buying Strike

A few signals are finally starting to reach oversold levels, but there's nothing to mark the extreme levels normally associated with more meaningful bottoms.

As I was looking at the charts earlier, particularly the down volume to up volume ratio (chart below), it struck me that the market hasn't seen any terribly strong selling yet. This seems to be more of a buying strike than a selling panic. Usually, we would expect to see some type of capitulation to mark a low that will last more than a few sessions, but we've so far seen nothing of the sort. As I stated yesterday:

What's interesting about this market is that it's managed to grind lower without reaching any extreme levels in bearish sentiment, or extreme oversold readings in certain key indicators such as the McClellan Oscillator (NYMO). As long as this situation persists, it is completely plausible for the decline to continue essentially unabated.

Below is the chart of the NYSE down volume to up volume ratio. Note how most meaningful lows are coincident with significant selling. So far, this decline hasn't even reached the selling levels of the April 2012 low. This of course doesn't preclude short-term bounces, but it's hard to see an intermediate-term bottom forming yet.

This tells us that the real selling hasn't even hit this market; it appears the bulls are holding "long and strong" for the time being. I've said it before: markets don't need tons of sellers to drop -- all they need is a lack of buyers.

Perhaps ironically, this is when the market is the most dangerous. Few realize that crashes usually start when the market is already oversold, not when it's overbought. The numbers are telling us that the real sellers haven't stepped in yet -- so it appears the decline is currently being driven primarily by short-term traders and algo-bots.

This is a market ripe for an "event." If things continue to muddle along and the real sellers don't ever step in, then the market will most likely continue to move in a reasonably orderly manner. But if this market gets spooked by something while in this position, it could easily spark a panic wave.

As I've said for the past couple weeks, the market is still in dangerous waters.

Moving on to the projections, my intermediate term outlook has remained unchanged for the past couple weeks, and I've continued (and still continue) to expect lower prices for the bigger picture.

The question now is exactly how we'll get there. Up until a couple days ago, the short-term targets were being hit perfectly... then the charts got a bit messy, and have stayed that way. The chart below shows two potential short-term wave counts; one is immediately bearish, the other is short-term bullish. Both roads are assumed to lead to the same intermediate term outcome, as shown above.

I'm favoring the count shown in blue and red by a very slim margin. I have labeled the black count as the alternate, but there's really nothing in the charts to give me a reason to strongly favor one result over the other.

I should also mention that there is a third option not shown on the chart below, and that's for a repeat of the fractal shown between black alt: ii and red (2) (called an "expanded flat"). I'm sorry the short-term charts are so messy right now. Blame the market -- I don't make the charts, I just read 'em. Things should become clear again soon.

In conclusion, it will be interesting to see if the bulls can get anything going here, or if the buying strike will continue. As of this moment, there are some reasons to suspect a short-term bounce may be in the cards, but as yet still nothing to indicate a substantial bottom. Trade safe.

PL, any way to shift the time to a EST time stamp, that is the hours and minutes? Other blogs have this. This is what I said 4 hours ago. In this way one can pair anyone's post with a chart and see exactly when a call was made.

ST ES going up, tgt 1340 es. IT I said back at the top that the tgt for this correction would be 1280 to 1320 $SPX. When we get there we will have to determine if this is an EW4 retrace or the beginning of something more ominous.

- One question for PL: Is there a reason you did not mention or indicate the MACD and RSI divergences, which are rising against this week's drop in SPX?

- One interesting article for everybody to read and comment on:http://www.forbes.com/sites/investor/2012/05/15/stocks-and-gold-should-rally-post-facebook-ipo/It seems that this point of view goes well with your "alternate" count and possible ST bounce in SPX

I agree an hour and minute time stamp would be very helpful. A lot of times I look at comments later in the day and then have to guess if 3 hours ago means 1:05 or 1:55. I guess we could all include our own time stamps in our posts if they are time sensitive.

Just like I called yesterday afternoon - rotation into smallcaps, transports and tech yesterday before the LTRO 3 rumor today. Amazing how EW analysis + Intermarket analysis allows you to be pretty successful in predicting the news.

Great article as always PL. It's amazing how everything in Europe is all fine and dandy today! Once again, this proves your theory PL that news headlines are almost always manipulated in order to fit the current EW pattern. I'm sure the situation in Europe will "deteriorate" rapidly once this bounce is over.

An expanded flat is a corrective pattern... in a downtrend wave a is 3-waves up, wave b is 3 waves down and exceeds the start of a, then wave c is five waves back up and exceeds the start of b. They're popular patterns because they blow out stops on each side of the trade.

That, combined with a complete 5-wave rally. When it's that clean, it's easy money, as long as you get in and out quick, because you're probably trading counter-trend if it's a five wave move... unless it's part of an expanded flat or the final c of an a-b-c zigzag.

katzo, could you toss up one of your ES charts w/ the waves labeled please? I'd love to see if I'm labeling the waves right on this impulse off the o/n lows. I'm grinding though the F&P book and working on correctly seeing the waves. Thanks.

Well, obviously something "twisted" or salty (pillar of salt that presages a big down swoop for us short freaks?).Katzo, just wanted to say thanks for the tips on watching the MACD 0 crossovers. Been watching and learning from them this morning.

with today's craziness, we might even see a 20-30% green day for UVXY, haven't had those for awhile now, 'cause like PL said, no panic selling yet....but then maybe I jinx it againJust now, it looked like people were rushing for the exits before the European close, maybe they all read Zerohedge. LOL

Let me illustrate something about the levels I provide. These tgt levels are pure EW mathematical levels. What I call meaningless spikes do not count, unless, of course, you got stopped out. One might say, katzo, the recent low on ES was 20.75 and I said the tgt was 25. You missed katzo, you do not know squat. But I argue, voila, look at that candle body on the 120.

The TF bid is the only thing keeping it up. This has been the case for the last few sessions. Plus the $TRAN remain stronger today than the rest. The $RVX is climbing so something is gonna happen soon imo.

How many times have I been "right" and uttered the 4 letter words . . . . let me count the ways!!!! Head bashing doesn't work. As a position trader,I nailed this decline at the top - and they literally top-ticked my stop! It's about the dreaded tail. Then, again, if one doesn't have a stop . . . well, Murphy's Law will always prevail. Nice call, K7! Gotta love this game.

I could easily be wrong, but I don't see market having big break down the day before FB IPO prices. That would scare off a lot of easy money people who are 'buy at any price' just to say they got FB in the IPO. Took a small stab long es at 29.50. Will reverse short at es 26.

This whole FB thing is interesting. Saw a poll in the paper today that said of those polled (don't know who they were) 50% think it is overvalued. And that might have been before they upped the price and # of shares being offered. A good % also called it a 'fad' and something else would come along. Time will tell.I'm a little worried about the # of Puts vs. Calls expiring this week on SPY, heard talk about this and that it could fuel a nice pop in the indexes.

OE this week. The greatest open interest for SPY is in the 135 puts. Calls in current trading area is mininal. The greatest hurt the market can cause is closing the week around 135 to make them worthless IMO

lets take a look at the 30yr u s treas bond here.....weekly chart going back to 1996......

fundamentally everything is going great for the bond and the u s dollar.........in fact, we may be in the throws of a deflationary move in risk assets that will wring out leveraged players and some non leveraged long term holders of risk. so far the trillions thrown against the wall by the fed in hopes that short term economic growth, over the last 4 years, would stick has only taken our debt and world debt to levels never endured by civilized nations. the miniscule growth weve seen is now flattening and rolling over into what may be a recession here.......europe is burning economically and will be literally soon. china is slowing markedly as is south america.

the U S A is the best looking horse in the glue factory as my father has said many times.

technically the 30yr bond has been in a declining channel as far back as my data goes.......now....connect a declining line to the high yield points in this chart.........move it down now equally on each side till the bottoms in yield connect.......this looks to me as if we will break below the 2.5% low in bonds and approach the 2% area soon......summer to early fall....

.an d there is a chance that the 4.75% high yield in 2011 then dropping down to 2.75%....200 basis pts after hving the recent climb and test of 3.5% could be an equal move set up to take the 30yr down to 1.5% before the party is over........3.5% minus 200basis is 1.5%

the fed owns trillions in u s bonds as do the chinese as do the japanese as do central banks and other huge investors.... they are not holding u s long bonds for inflationary reasons......they are holding them for deflationary reasons.

when the fed and others begin to unload bonds it will be at the 2% to 1.5% level which insures they make a killing on them to help offset the huge losses they hold in other soverigns. and i anticipate they will reenter the risk asset markets again only after deflation has transferred enuf wealth out of the publics hands and traders too.

watch for govt action forcing community banks, pensions and other huge pools of the publics money to invest in u s treas bonds when those yields get the 2% area and lower....they will b left holding the bag.

For dinner this evening we are pleased to present the specialty of the house, PL's black count. It is a delicious combination of nested 1's and 2's along with a hint of expanded flat. It pairs exceptionally well with a vintage Katzo7.

For dessert, a reminder of how Oct '87 played out:

Wed was bad, but not noteworthy terrible. Thursday was flat. Friday you thought was bad until you came in Monday and got -23% in one day....Life did go on afterwards, it wasn't all survival bunkers and spam.

the CNBS anchor said "JPM only lost their own money" -- NONE of "their" money is their money!! It's all taxpayer dollars...the big banks have NO CAPITAL!!! what little they do have is from TARP bailout - not to mention the ZIRP and QE ongoing bailouts! %$&*%^%$$$%^$%!!!~!!!!!!

Nenner;S&P...short term cycle down umtil May 22 and the weekly cycle is not supportingIf our S&P 1325 level holds and the s/t cycle bottoms, then would consider playing the bounceclose above 1345 and 2625 would give reason for a bounce.

Gold & Silver continue on a sell signal a move to 1370 on Gold and 23 on Silver is possible.Copper sell signal continues s/t downside target of $3.49, we are short with a stop at $3.65

Crude is holding around $93 but daily and weekly cycles are still down. breaking $93 we could see $68.

US Bonds the 30 year could go as high as $149.15. close below $143.20/30 yr $132.20/10 yr or 118 on TLT will be a sell signal.

Euro...sell signal continues, but a close above $128.50 EUR/USD will cancel the sell.

A recent interview on Bloomberg: http://www.bloomberg.com/video/92684661/

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